HONG KONG (Reuters) - China Cinda Asset Management's drive to crank profit out of bad loans has come at a cost - a debt mountain of its own.

As it homes in on Hong Kong's biggest initial public offering this year, the distressed debt manager's borrowing has risen twenty-fold in the last three years to more than its maximum market value at listing.

The surge to 104.1 billion yuan ($17 billion) in debt at the end of June came as Cinda went on a spree, scooping up distressed assets from the likes of real estate projects, cement makers, miners and coal companies unable to pay back loans.

The debt pile, revealed for the first time in Cinda's IPO prospectus, doesn't just expose the company to risk factors including short- and long-term interest rate hikes. It means Cinda's reliance on backing from the government and Chinese financial institutions to fuel its growth is set to intensify, even as the sale of up to $2.5 billion in shares attracts some of the world's biggest global investors.

"In the end the question is what are the returns they're going to get on the assets that they're buying," said Charlene Chu, China bank analyst at Fitch Ratings in Beijing. "Will the returns be sufficient to pay back the obligations that they owe?"

The IPO has lured sovereign wealth funds and hedge funds betting that soured loans will be big business in China's slowing economy. Hong Kong market sources say demand for the shares, due to list on December 12, has been brisk since the prospectus was launched on Monday.

There's no suggestion that Cinda's major shareholder, China's Ministry of Finance, or other lenders won't continue to support the company or roll over borrowings if Cinda needs more time to pay back its own debt.

But Cinda said in its IPO prospectus that, "If sufficient financing is not available to meet our needs, or cannot be obtained on a commercially acceptable terms, or at all, we may not be able to fund our operations, investments and business expansion, introduce new business or compete effectively."

Company officials said at an IPO presentation in Hong Kong on Wednesday that they're comfortable with Cinda's debt strategy and are looking to further diversify funding sources in the future.

BORROWING SHIFT

Cinda was created in 1999 to take on the bad debts of China Construction Bank (CCB) (601939.SS). It initially borrowed money from the government to take on and process CCB's bad loans.

The company has since shifted its funding to other entities beyond China's Ministry of Finance and the central bank, according to the IPO prospectus. Cinda increasingly taps other Chinese financial institutions, referring to these lenders in the prospectus as "market-oriented sources".

The 104.1 billion yuan in borrowing at the end of June compares with just 7.83 billion yuan at the end of 2010.

Nearly half of the loans mature in one year or less. Their short-term nature underscores the risks Cinda could face in the event of a cash crunch similar to the one that affected Chinese markets in June.

"The potential is certainly there for any entity that has that type of profile," Fitch's Chu added.

The vast majority of the borrowings, 95.3 billion yuan, are unsecured loans, which also exposes lenders in case Cinda faces any liquidity shortage.

Still, the company has relationships with over 100 banks in China without any single one having a major exposure, according to a person familiar with the IPO plans, limiting potential losses should any crunch occur.

Ultimately, analysts say, the company remains backed by the Chinese government, and concerns about its future liquidity would be overblown. After the IPO, the Ministry of Finance will own 69.6 percent of the company, compared with 83.5 percent before.

"The core point is it's supported, or controlled, by the Chinese government and that gives it a very powerful backing in the market, no matter the lenders or borrowers," said Xingyu Chen, a banking analyst at Phillip Securities in Shanghai.